Braemar Hotels & Resorts Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2019. Braemar is a REIT focused on luxury hotels and resorts. It held interests in 13 hotels with 3,719 rooms (3,484 net rooms); Ashford LLC provides advisory and asset-management services, while hotel operators manage the properties.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $118.5 million | $121.1 million | $247.0 million | $223.6 million |
| Operating income | $12.7 million | $37.1 million | $26.8 million | $51.4 million |
| Net income (loss) attributable to Braemar | $(4.5) million | $11.5 million | $(5.5) million | $15.6 million |
| Net income (loss) attributable to common stockholders | $(7.0) million; $(0.22)/share | $9.8 million; $0.30/share | $(10.6) million; $(0.34)/share | $12.1 million; $0.37/share |
| Operating cash flow | Not separately presented | Not separately presented | $32.5 million | $38.7 million |
| Adjusted EBITDAre | $32.8 million | $39.2 million | $67.5 million | $69.4 million |
| Adjusted FFO | $18.0 million | $25.7 million | $37.2 million | $45.3 million |
At June 30, cash and cash equivalents were $80.4 million and restricted cash was $70.1 million, versus $182.6 million and $75.9 million, respectively, at year-end 2018. Net cash, cash equivalents and restricted cash declined $108.1 million in the first half. Net debt carrying value was $1.048 billion (gross debt $1.055 billion), up from $986 million net at year-end. Debt was entirely variable-rate; management estimated a 25-basis-point rate change would affect annual results by approximately $2.6 million.
First-half investing cash outflow was $183.2 million, including $111.8 million for the Ritz-Carlton, Lake Tahoe and $72.7 million of hotel improvements. Financing provided $42.7 million, including $249.0 million of borrowings and $187.1 million of debt repayments. The $100 million revolving facility was undrawn at quarter-end; the company reported compliance with its covenants, including a 56.6% debt-to-asset ratio and 1.61x fixed-charge coverage ratio.
Material changes versus prior periods
- Q2 revenue declined 2.1%; first-half revenue rose 10.5%, principally reflecting the Lake Tahoe acquisition and a full-period contribution from the Ritz-Carlton, Sarasota, acquired in April 2018. The Tampa Renaissance was sold in June 2018.
- Comparable-hotel results were softer: Q2 comparable RevPAR was $232.76 versus $238.89, and first-half comparable RevPAR was $221.26 versus $224.57. Occupancy fell, partly offset by higher room rates.
- First-half GAAP operating income fell despite higher revenue, with hotel operating expenses up 17.1% and depreciation and amortization up 26.4%. Prior-year results included a $15.7 million Tampa Renaissance sale gain; prior-year Q2 also included $4.2 million of loan-cost and exit-fee write-offs.
- Interest expense and loan-cost amortization increased 10.9% in Q2 and 23.6% in the first half, reflecting additional acquisition debt and higher average LIBOR.
- Q2 and first-half losses included unrealized losses of $4.6 million and $3.9 million, respectively, on Braemar’s Ashford Inc. investment. Its fair value declined to $6.2 million from $10.1 million at year-end 2018.
Outlook, risks, contingencies and unusual items
- No specific earnings or operating guidance was provided. Management said cash from operations and existing cash balances should cover anticipated next-12-month operating needs, working capital, capital expenditures, dividends needed for REIT status, and debt interest and principal payments, excluding potential final-maturity principal payments.
- The revolving facility matured in November 2019, with two one-year extension options subject to conditions. A subsequent event: on August 5, Braemar refinanced the $42.0 million Ritz-Carlton, St. Thomas loan with a $42.5 million interest-only loan, initially due in two years and with three extension options.
- Ritz-Carlton, St. Thomas had all rooms out of service during Q2 for hurricane-related renovation. Braemar recognized $6.6 million of hurricane business-interruption revenue in Q2 and $12.6 million in the first half. These recoveries are an important, non-recurring contributor to revenue.
- Interest-rate exposure, hotel seasonality, renovation-related room outages, access to debt and equity capital, and potential cash traps under certain loans may affect liquidity and results. The filing says 100% of debt was variable-rate.
- Braemar relies on Ashford-affiliated service providers and has related-party arrangements, including the Enhanced Return Funding Program. The arrangement provides up to $50 million of acquisition-related funding, subject to specified terms; $1.4 million had been received by June 30 and a further $8.9 million was received July 1 through FF&E sales leased back rent-free.
- Management said pending legal matters were not expected to have a material adverse effect based on current estimates, while noting outcomes cannot be predicted with certainty. No material changes to the 2018 Form 10-K risk factors were reported.
Most important facts for investors to verify
- Whether hotel demand, occupancy and comparable RevPAR recover after Q2 declines and renovation-related disruptions.
- The timing and cost of completing work at Ritz-Carlton, St. Thomas and The Notary Hotel, and the amount and duration of remaining insurance recoveries.
- Debt maturities, revolver extension or refinancing terms, covenant headroom, and sensitivity to variable interest rates.
- Cash available for capital spending and dividends after restricted cash, debt service and recurring hotel renovation needs.
- The sustainability of adjusted EBITDAre and adjusted FFO, which are non-GAAP measures and do not equal cash available for distributions.
- Terms, governance and financial effects of Ashford-related agreements and the proposed Ashford Inc. hotel-management business combination.